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APRA heatmap puts spotlight on investment implementation

The Australian Prudential Regulation Authority's (APRA) ‘heatmap’ of MySuper performance numbers, published for the first time in December, will highlight the importance of investment implementation, experts have warned.

As a discipline, investment implementation refers to the effective implementation of investment decisions and strategies, including portfolio rebalancing, liquidity management and transition management among other things. Compared to the alpha generating impact that investment decision making can have, investment implementation has sometimes been referred to as an “after thought” – with some dismissing the benefits as “picking up pennies in front of a freight train”.

That attitude, experts say, is no longer acceptable, and APRA’s heatmap will further crank up the pressure. The heatmap, which was first published in December 2019, uses a graduating colour scheme to provide “like for like” comparisons on the investment performance, fees and costs, and sustainability of member outcomes across MySuper products.

In the context of investment implementation, it’s the evaluation of investment performance that is particularly relevant. As different products have their own unique membership, return objectives and risk profiles that impact investment strategy and ultimately investment returns, developing a “like for like” comparison is easier said than done. To achieve this, APRA has constructed reference and benchmark portfolios to essentially provide risk adjusted insights into the performance of each product and lifecycle stage.

Specifically, the Net Investment Return (NIR) of MySuper products and lifecycle stages are measured against a Simple Reference Portfolio (SRP) and a Strategic Asset Allocation (SAA) benchmark portfolio, which are both product-specific and tailored to reflect the investment strategy and level of risk of the product or lifecycle stage.

What that means in practice is that if the heatmap shows that your fund is underperforming, it should not be due to your strategic asset allocation, because that’s been adjusted for in the reference and benchmark portfolios.

According to Craig Roodt, director investment and wealth advisory at Deloitte, it’s the quality of investment implementation that will come into the spotlight. “With the heatmap, if you’re an underperformer, you need to understand why it is you’re underperforming. It shouldn’t be due to your strategic asset allocation decisions, because APRA has adjusted for that; so could it be that your tactical asset allocation bets are detracting from value? If you’re hedging, are you paying too much for your derivatives contracts? Is it because of implementation leakage? Are you paying too much unnecessary tax or transaction costs that detract from your net performance? These are the questions that are highly relevant and that fall squarely in the scope of investment implementation,” he said.

To discuss these implications in more detail, Roodt is joining Mark Ferguson, head of investment risk at APRA, David Djukanovic, head of portfolio implementation at ANZ Wealth and Andrew Povah, senior investment consultant at Willis Towers Watson, at the 3rd Investment Implementation Summit in Sydney. For more information, please view the agenda.